A public company that files periodic reports with the Securities and Exchange Commission ("SEC") under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is required to disclose certain tax penalties in its Annual Report on Form 10-K. IRS guidance also applies this requirement to other periodic reports filed with the SEC which are listed below. This disclosure is required by Section 6707A(e) of the Internal Revenue Code of 1986, as amended, and Rev. Proc. 2005-51, Internal Revenue Bulletin 2005-33 (August 15, 2005). The disclosure must be made in the annual report that relates to the fiscal year in which the IRS sends the company a notice and demand for payment of the penalty. If the company pays the penalty (excluding interest) in full prior to receiving IRS notice and demand for payment, the requirement to pay the penalty must be disclosed in the annual report relating to the fiscal year in which such payment was made. If the company fails to make the required disclosure, that failure to disclose the penalty, in addition to the penalty itself, must be disclosed in the company's next annual report.

In March 2007, the IRS released Rev. Proc. 2007-25, Internal Revenue Bulletin 2007-12 (March 19, 2007), which provides that, although Rev. Proc. 2005-51 referred specifically to the Form 10-K, the tax penalties disclosure is equally applicable to companies filing periodic reports under Section 13 or 15(d) of the Exchange Act on a form, other than Form 10-K, including:

  • Form 11-K, Annual Report of Employee Stock Purchase, Savings and Similar Plans, under the heading "Legal Proceedings";
  • Form 20-F, Annual Report of Foreign Private Issuers, in Item 8 (Financial Information) under the heading "Legal Proceedings";
  • Form 40-F, Annual Report of Certain Canadian Issuers, under the heading "Legal Proceedings";
  • Form N-SAR, Annual Report of Registered Investment Companies, in Sub-Item 77E (Legal Proceedings); and
  • Form N-CSR, Annual Report of Registered Investment Companies, in Item 1 (Reports to Stockholders) under the subheading "Legal Proceedings."

Specifically, a company subject to the SEC's reporting requirements is required to disclose:

  • Any penalties imposed by Section 6707A(a) incurred with respect to a failure to report in a tax return a "listed transaction," defined as a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS guidance as a tax avoidance transaction for purposes of Section 6011 of the IRC. The amount of such penalty would be $200,000;
  • Any accuracy-related penalties imposed by IRC Section 6662A at the 30% rate for a reportable transaction understatement with respect to which the relevant facts affecting the tax treatment of the item were not adequately disclosed in accordance with IRS regulations;
  • Any accuracy-related penalties imposed by IRC Section 6662(a) at the 40% rate for a gross valuation misstatement, if the company would, but for certain exclusions, have been subject to the accuracy-related penalty under Section 6662A(a) at the 30% rate; and
  • Any penalty for failure to disclose any of the foregoing penalties in periodic reports filed with the SEC.

When disclosing tax penalties, the reporting company must describe the amount of the penalty, whether the penalty has been paid in full, the IRC section and subparagraph under which the penalty was determined, and a description of the nature of the penalty.

Each failure to disclose any of the foregoing penalties in a company's periodic reports filed with the SEC will subject the company to an additional $200,000 penalty until the required disclosure is made.

On September 10, 2008, the IRS released Regulation §301.6707A-1T, which applies to disclosure statements due after September 11, 2008 and expires on September 9, 2011. The regulation outlines the procedures for requesting IRS rescission of penalties imposed under Section 6707A and states that the penalty for failure to disclose tax penalties in the SEC filings cannot be rescinded.

Questions

Any person who has a question regarding the issues raised in this Corporate and Securities Update may obtain additional guidance from a member of our Public Companies Group.

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